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Part 1. Introduction

Consider the following bank transfer* between two empty bank accounts: Account #1** and Account #2;

Before the transfer

Account #1 Description Debits Credits Balance Starting balance £0 Account #2 Description Debits Credits Balance Starting balance £0

Figure 1.1. The two empty bank accounts before the transfer.

After the transfer

Account #1 Description Debits Credits Balance Starting balance £0 Debited to Account #2 £100 £100 (DR) Debt Money Account #2 Description Debits Credits Balance Starting balance £0 Credited from Account #1 £100 £100 (CR)

Figure 1.2. The two bank accounts after a £100 transfer from Account #1 to Account #2

The transfer has left Account #1 in debt by £100 and Account #2 in credit by £100. This is the essence of fiat money creation. Fiat money is ledger money or money of account, and hence exists only as credit entries on bank accounts and bank ledgers. All fiat money is owed back; hence it is also referred to as debt-based money with paper notes being referred to as debt notes.

How notes and coins fit in with ledger money is explained later in part 20, but before we get to that we need to go over the theory behind ledger money, next.

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Continue to Part 2:
The rules of money

*Since this is a UK site, the pound sterling is used as the currency; although, any fiat currency could be used.
**The # symbol should be read as 'number' as in 'account number 1'.